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Kyalami Hills, Craighall Park, Fontainebleu, Lyndhurst and Houghton Estate emerged as the top five investment-grade suburbs in the Greater Johannesburg area according to a recent survey conducted by TPN, Africa’s largest credit bureau for rental properties.
Picking the right suburb is key for property investors, and investment-grade suburbs typically offer stronger total returns on an investment.
Gross yield, effective yield, capital growth and ratio of paying tenants are criteria that allow investors to identify suburbs that offer such an opportunity.
“Opportunity exists. It is just about identifying what meets your particular strategy,” says TPN managing director Michelle Dickens. That strategy could mean the aim of achieving reliable income from renting rather than realising equity through capital growth. Or it could be a mix of both.
Identifying the suburb to invest in could be tricky without reliable data.
“There are 16 000 suburbs to choose from in South Africa and 2.1m households in formal rental accommodation,” Dickens said at an Absa Private Banking event where she shared recent analysis of suburbs in Johannesburg with the highest investment rating.
The analysis covers sectional title investment properties valued above R200 000 in 22 suburbs in the Greater Johannesburg area.
Capital growth:
Midrand’s Kyalami Hills not only triumphs overall for total returns, it also topped the list in capital growth. It posted an annual average capital growth of 11% over the last eight years, against Greater Johannesburg’s average of 2.5%. Of the suburbs covered, aside from Windsor East’s almost zero capital growth, Halfway House is the only suburb to display negative capital growth.
Effective yield:
Effective yields measure gross yield when delinquency rates are subtracted. The Johannesburg suburb of Berea’s effective yield is a monumental 23% against an average of 8.6%.
This could have something to do with tenant payment behaviour. While tenants in Berea may not always pay timeously, says Dickens, they do pay…eventually.
But, she says, that high yield also has to do with the average value of property, which in Berea is around R221 000. “While fabulous for investors, picking up just one unit is not always fun and games.”
That implies that single unit investors run the risk of investing in a badly maintained building without security, which attracts delinquent tenants.
“You really have to know inner city behaviour when you invest in areas like Berea,” she cautions. “Generally investor landlords are buying entire buildings and putting in proper security like biometric access to secure the building.”
Together with proper maintenance, methods such as these help landlords attract quality tenants.
Good standing ratio (or paying tenants):
East Rand’s Goedeburg, Sandton’s Douglasdale and Alberton’s Verwoerdpark are among the suburbs with low tenant delinquency ratios, all boasting over 90% of paying tenants.
Gross yield:
Given it’s effective yield, it’s no surprise that Berea is again at the top with 26.7% gross yield.
Randburg’s Bloubosrand and Windsor East also display attractive gross yields, but both suburbs exhibit high delinquent tenant behaviour.
“It’s a huge risk for landlords who own properties in Windsor East with the tenant in good standing ratio now only 58%, meaning that 42% of tenants aren’t paying their rent,” says Dickens.
It remains important that investors consider the entire investment picture, and therefore look at total returns – capital growth, effective yield and non-paying yield – before making a decision.
